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Finance Act 2008

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This is the original version (as it was originally enacted).

Section 62

SCHEDULE 22Avoidance involving financial arrangements

Rent factoring of leases of plant or machinery

1(1)Section 785A of ICTA (rent factoring of leases of plant or machinery) is amended as follows.

(2)In subsection (1), omit paragraph (d).

(3)In subsection (2)—

(a)for “relevant portion of the consideration” substitute “market value of the rights transferred”, and

(b)for “in a period of account to the extent that it is receivable in that period of account” substitute “at the time of the transfer”.

(4)After that subsection insert—

(2A)But subsection (2) does not apply if and to the extent that any of the market value of the rights transferred is (apart from this section) brought into account—

(a)as income, or

(b)as a capital allowances disposal receipt.

(5)After subsection (5) insert—

(5ZA)The references in subsections (1)(c) and (3) to another person include any person in which P has an interest, including any partnership of which P is a member and the trustees of any trust of which P is a beneficiary.

(6)The amendments made by this paragraph have effect in relation to arrangements for transfers of rights entered into on or after 12 March 2008.

Credit allowable in relation to interest

2(1)In section 807A of ICTA (disposals and acquisitions of company loan relationships with or without interest), omit subsection (3) (credit allowable as if amount of foreign tax had been paid).

(2)Accordingly, omit—

(a)in section 807A of ICTA, subsections (5) and (6) and, in subsection (7), the definitions of “related transaction” and “trading credit”, and

(b)section 91(4) of FA 1997.

(3)The repeals made by this paragraph have effect in relation to related transactions on or after 12 March 2008.

Distributions arising from tax arrangements

3(1)In paragraph 1 of Schedule 9 to FA 1996 (loan relationships: distributions), after sub-paragraph (1) insert—

(1A)Credits relating to any amount which falls, when paid, to be treated as a distribution in respect of a loan relationship are to be brought into account for the purposes of this Chapter if the amount arises in consequence of, or otherwise in connection with, arrangements the purpose, or one of the main purposes, of which is securing for any person a tax advantage; and for this purpose—

(a)“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions, and

(b)“tax advantage” has the meaning given by section 840ZA of the Taxes Act 1988.

(2)The amendment made by sub-paragraph (1) has effect in relation to accounting periods ending on or after 12 March 2008 but, in the case of an accounting period beginning before that date, only if the credits relate to any time on or after that date.

Disposals for consideration not recognised by accounting practice

4(1)In Schedule 9 to FA 1996 (loan relationships: special computational provisions), after paragraph 11A insert—

Disposals for consideration not fully recognised by accounting practice

11B(1)This paragraph applies where in any accounting period (“the relevant accounting period”) a company, with the relevant avoidance intention, disposes of rights under a creditor relationship (in whole or in part) for consideration which—

(a)is not wholly in the form of money or a debt that falls to be settled by the payment of money, and

(b)is not fully recognised.

(2)The relevant avoidance intention is the intention of eliminating or reducing the credits to be brought into account for the purposes of this Chapter.

(3)Consideration is not fully recognised if, as a result of the application of generally accepted accounting practice, the full amount or value of the consideration is not recognised in determining the company’s profit or loss for the relevant accounting period or any other accounting period.

(4)In determining the credits to be brought into account by the company for the period for the purposes of this Chapter, it is to be assumed that the whole of the consideration is recognised in determining the company’s profit or loss for the relevant accounting period.

(5)But this paragraph does not apply if paragraph 1(2) of Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) operates in relation to the disposal so as to increase the tax liability of the company.

(2)In Schedule 26 to FA 2002 (derivative contracts), after paragraph 27 insert—

Disposals for consideration not fully recognised by accounting practice

27A(1)This paragraph applies where in any accounting period (“the relevant accounting period”) a company, with the relevant avoidance intention, disposes of rights or liabilities under a derivative contract (in whole or in part) for consideration which—

(a)is not wholly in the form of money or a debt that falls to be settled by the payment of money, and

(b)is not fully recognised.

(2)The relevant avoidance intention is the intention of eliminating or reducing the credits to be brought into account for the purposes of this Schedule.

(3)Consideration is not fully recognised if, as a result of the application of generally accepted accounting practice, the full amount or value of the consideration is not recognised in determining the company’s profit or loss for the relevant accounting period or any other accounting period.

(4)In determining the credits to be brought into account by the company for the period for the purposes of this Schedule, it is to be assumed that the whole of the consideration is recognised in determining the company’s profit or loss for the relevant accounting period.

(5)But this paragraph does not apply if paragraph 1(2) of Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) operates in relation to the disposal so as to increase the tax liability of the company.

(3)The amendments made by this paragraph have effect in relation to disposals on or after 16 May 2008.

Avoidance relying on continuity of treatment provisions

5(1)In paragraph 12 of Schedule 9 to FA 1996 (loan relationships: continuity of treatment), after sub-paragraph (2C) insert—

(2D)This paragraph does not apply where—

(a)the transferor company is party to arrangements in accordance with which there is likely to be a transfer of rights or liabilities under the loan relationship by the transferee company to another person in circumstances in which this paragraph would not apply, and

(b)the purpose, or one of the main purposes, of the arrangements is to secure a tax advantage for the transferor company or a person connected with it.

(2E)In sub-paragraph (2D) above—

(a)“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions,

(b)“tax advantage” has the meaning given by section 840ZA of the Taxes Act 1988, and

(c)“transfer” includes any arrangement which equates in substance to a transfer (including an acquisition or disposal of, or increase or decrease in, a share of the profits or assets of a partnership);

and section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of that sub-paragraph.

(2F)This paragraph does not apply in relation to a disposal if paragraph 11B above applies in relation to it.

(2)In paragraph 28 of Schedule 26 to FA 2002 (derivative contracts: continuity of treatment), after sub-paragraph (3ZA) insert—

(3ZB)This paragraph does not apply where—

(a)the transferor company is party to arrangements in accordance with which there is likely to be a transfer of rights or liabilities under the derivative contract by the transferee company to another person in circumstances in which this paragraph would not apply, and

(b)the purpose, or one of the main purposes, of the arrangements is to secure a tax advantage for the transferor company or a person connected with it.

(3ZC)In sub-paragraph (3ZB) above—

(a)“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions,

(b)“tax advantage” has the meaning given by section 840ZA of the Taxes Act 1988, and

(c)“transfer” includes any arrangement which equates in substance to a transfer (including an acquisition or disposal of, or increase or decrease in, a share of the profits or assets of a partnership);

and section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of that sub-paragraph.

(3ZD)This paragraph does not apply in relation to a disposal if paragraph 27A applies in relation to it.

(3)The amendments made by this paragraph have effect in relation to transactions taking place, or a series of transactions of which the first takes place, on or after 16 May 2008.

Distributions from shares treated as loan relationships

6(1)In FA 1996, in—

(a)section 91A(2)(b) (distributions in respect of shares subject to outstanding third party obligations), and

(b)section 91B(2)(b) (distributions in respect of non-qualifying shares),

omit “falling within section 209(2)(a) or (b) of the Taxes Act 1988”.

(2)The repeals made by sub-paragraph (1) have effect in relation to distributions on or after 9 October 2007.

Depreciatory transactions

7(1)Section 91A of FA 1996 (shares treated as loan relationship: shares subject to outstanding third party obligations which are interest-like investments) is amended as follows.

(2)After subsection (2) insert—

(2A)No debits are to be brought into account by the investing company for the purposes of this Chapter as respects the share.

(3)In subsections (3) and (4), omit “debits and”.

8(1)Section 91B of FA 1996 (shares treated as loan relationship: non-qualifying shares) is amended as follows.

(2)After subsection (2) insert—

(2A)No debits are to be brought into account by the investing company for the purposes of this Chapter as respects the share.

(3)In subsections (3) and (4), omit “debits and”.

(4)After subsection (6) insert—

(6A)Where a share is a non-qualifying share for the purposes of this section by reason of the Condition in section 91E being satisfied—

(a)subsection (2A) does not apply in relation to the share, but

(b)the amount of the debits brought into account by the investing company as respects the share are not to exceed the amount of the credits brought into account in respect of the associated transactions under Schedule 26 to the Finance Act 2002.

9The amendments made by paragraphs 7 and 8 have effect in relation to accounting periods ending on or after 12 March 2008 but, in the case of an accounting period beginning before that date, only if the debits relate to any time on or after that date.

Falsifying transactions

10(1)Section 91A of FA 1996 (shares treated as loan relationship: shares subject to outstanding third party obligations) is amended as follows.

(2)In subsection (7), for “paragraph (b) above” substitute “this subsection”.

(3)In subsection (8)(b), after “will be” insert “or has been”.

11(1)Section 91C of FA 1996 (shares treated as loan relationship: shares likely to increase in value at rate representing return on investment of money) is amended as follows.

(2)In subsection (1), for “paragraph (b) above” substitute “this subsection”.

(3)In subsection (6), for “entered into by the investing company” substitute “or has been entered into”.

12The amendments made by paragraphs 10 and 11 have effect in relation to times on or after 12 March 2008.

Non-qualifying shares

13(1)In section 91B(5)(a) of FA 1996 (debits and credits to be brought into account where Condition 3 in section 91E is satisfied), omit “by the investing company”.

(2)The repeal made by sub-paragraph (1) has effect in relation to credits and debits relating to any time on or after 16 May 2008.

Income producing assets

14(1)In section 91C(3) of FA 1996 (assets which are income producing), for paragraph (c) substitute—

(c)any share as respects which the condition in section 91D(1)(b) below is satisfied;.

(2)The amendment made by sub-paragraph (1) has effect in relation to times on or after 16 May 2008.

Exit arrangements

15(1)In section 91D(2) of FA 1996 (shares treated as loan relationship: redeemable shares), omit “or” at the end of paragraph (a) and insert at the end or

(c)it is reasonable to assume that the investing company will or might become entitled to qualifying redemption amounts.

(2)The amendments made by sub-paragraph (1) have effect in relation to times on or after 12 March 2008.

Schemes etc designed to reproduce interest-like return

16(1)Section 91E of FA 1996 (shares treated as loan relationship: schemes etc designed to produce return equating to return on investment of money at interest) is amended as follows.

(2)In subsection (1)—

(a)after “arrangement” insert “(whether or not the investing company is a party to it)”, and

(b)after “return” insert “(for any one or more persons)”.

(3)In subsection (3), insert at the end (but not as part of paragraph (d))—

and acquiring rights or receiving benefits in respect of other shares.

(4)The amendments made by this paragraph have effect in relation to times on or after 12 March 2008.

Partnerships

17(1)In FA 1996, after section 91G insert—

Partnerships

91HPayments in return for capital contribution

(1)This section applies where a company is a party to relevant arrangements under which—

(a)a partnership of which it is a member is or may become entitled to receive a capital contribution from any person (whether directly or indirectly), and

(b)that person, or a person connected with that person, receives a sum of money or other asset from the company (whether directly or indirectly).

(2)In subsection (1) “relevant arrangements” means arrangements—

(a)which are designed to produce for the company a return which equates, in substance, to a return on the investment of the money or other asset at a commercial rate of interest, and

(b)the purpose or one of the main purposes of which is to secure a tax advantage.

(3)The return is to be treated for the purposes of this Chapter as a profit from a loan relationship of the company; and the credits to be brought into account in respect of the loan relationship are to be determined on the amortised cost basis of accounting.

(4)But where the return to any extent represents partnership profits in respect of which the company is chargeable to corporation tax (whether for the same or any earlier accounting period), the charge to corporation tax is to be reduced to such extent as is just and reasonable.

(5)Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of subsection (1).

(6)In subsection (2)—

(a)“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions, and

(b)“tax advantage” has the meaning given by section 840ZA of the Taxes Act 1988.

91IChange of partnership shares

(1)This section applies where a company is a party to relevant arrangements under which—

(a)the company makes a capital contribution to a partnership of which it is a member,

(b)profits of the partnership fall to be shared in a way such that the company is not allocated the whole of its due share of the profits, and

(c)the capital of the partnership falls to be shared in a way such that the company or a person connected with the company is entitled to more than the whole of its due share of the capital.

(2)In subsection (1) “relevant arrangements” means arrangements—

(a)which are designed to produce for the company a return which equates, in substance, to a return on the investment of the capital contribution at a commercial rate of interest, and

(b)the purpose or one of the main purposes of which is to secure a tax advantage.

(3)The return is to be treated for the purposes of this Chapter as a profit from a loan relationship of the company; and the credits to be brought into account in respect of the loan relationship are to be determined on the amortised cost basis of accounting.

(4)But where the return to any extent represents partnership profits in respect of which the company is chargeable to corporation tax (whether for the same or any earlier accounting period), the charge to corporation tax is to be reduced to such extent as is just and reasonable.

(5)For the purposes of subsection (1) a company’s “due share” of any profits or capital is the share that the company would have been allocated or entitled to if allocation or entitlement were determined by reference to the proportion of the total capital contributed to the partnership that was contributed by it.

(6)Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of subsection (1).

(7)In subsection (2)—

(a)“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions, and

(b)“tax advantage” has the meaning given by section 840ZA of the Taxes Act 1988.

(2)In section 131 of FA 2004 (companies in partnership), insert at the end—

(10)Subsection (4) does not apply if and to the extent that the chargeable amount is brought into account under section 91H or 91I of the Finance Act 1996.

(3)The amendments made by this paragraph have effect in relation to returns arising on or after 12 March 2008.

Loan relationships treated differently by debtor and creditor

18(1)In FA 1996, after section 94A insert—

94BLoan relationships treated differently by connected debtor and creditor

(1)This section applies where there are two companies which are connected and conditions A, B and C are met.

(2)Condition A is that one of the companies (“the debtor company”), in accordance with generally accepted accounting practice, treats the rights and liabilities under a loan relationship to which it is a party as debtor as divided between—

(a)rights and liabilities under a loan relationship (“the host contract”), and

(b)rights and liabilities under one or more derivative financial instruments or equity instruments.

(3)Condition B is that the other company is party to the loan relationship as creditor (“the creditor company”) and, in accordance with generally accepted accounting practice, does not treat its rights and liabilities under the loan relationship as so divided.

(4)Condition C is that the debits brought into account by the debtor company under this Chapter in respect of the host contract for any accounting period exceed the credits brought into account (otherwise than by virtue of this section) in respect of the loan relationship by the creditor company for the corresponding accounting period or periods of the creditor company.

(5)The creditor company is to be treated for the purposes of this Chapter as bringing into account for the corresponding accounting period or periods additional credits in respect of the loan relationship of an amount equal to the excess.

(6)But where the creditor company is party to the loan relationship as creditor during only part of the corresponding accounting period (or any of the corresponding periods) it is to be treated for those purposes as bringing into account for the period only such portion of the excess as is just and reasonable.

(7)The references in this section to a company which is party to a loan relationship as debtor or creditor include a company which indirectly stands in the position of a debtor or creditor as respects the loan relationship by reference to a series of loan relationships or money debts which would be loan relationships if a company directly stood in the position of debtor or creditor.

(8)For the purposes of this section an accounting period of the creditor company corresponds with an accounting period of the debtor company if it coincides with it or falls wholly or partly within it.

(9)Where a corresponding accounting period of the creditor company does not coincide with that of the debtor company such apportionments as are just and reasonable are to be made for the purposes of this section.

(10)Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this section; but two companies are also connected for the purposes of this section if their accounting results are reflected in the consolidated group accounts of a group of companies.

(2)In paragraph 7 of Schedule 6 to F(No.2)A 2005 (loan relationships with embedded derivatives), after sub-paragraph (1) insert—

(1A)An election under this paragraph does not have effect in relation to any relevant assets in the case of which section 94B of FA 1996 applies.

(3)The amendment made by sub-paragraph (1) has effect in relation to debits and credits arising on or after 12 March 2008.

(4)The amendment made by sub-paragraph (2) has effect in relation to elections made on or after that date.

Commercial rate of interest

19(1)In section 103 of FA 1996 (interpretation of Chapter 2 of Part 4), omit subsections (3A) and (3B) (meaning of “commercial rate of interest”).

(2)Accordingly—

(a)in section 91A(7)(a) of FA 1996, omit “(see section 103(3A))”, and

(b)in Schedule 7 to F(No.2)A 2005, omit paragraph 13.

(3)The repeals made by this paragraph have effect in relation to times on or after 12 March 2008.

Derivative contracts

20(1)Schedule 26 to FA 2002 (derivative contracts) is amended as follows.

(2)In paragraph 3(1)(b)(ii) (contract must be treated for accounting purposes as financial asset or liability), for “is treated for accounting purposes as, or as forming” substitute “for accounting purposes is, or forms”.

(3)In paragraph 4(2)(b) (contracts excluded by virtue of underlying subject matter) after “(2D)” insert “and which are not designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest”.

(4)The amendments made by this paragraph have effect in relation to accounting periods ending on or after 12 March 2008.

(5)But where a company was, immediately before that date, a party to a relevant contract that becomes a derivative contract for the purposes of Schedule 26 to FA 2002 by virtue of those amendments, it is to be regarded for those purposes as having been entered into by the company on that date for a consideration equal to the notional carrying value (within the meaning of paragraph 43A(5) of that Schedule) on that date.

Restrictions on relief for interest payments

21(1)Section 384 of ITA 2007 (general restrictions on relief for interest payments) is amended as follows.

(2)In subsection (2), for “interest is paid at a rate in excess of a reasonable commercial rate” substitute “the interest paid on a loan in a tax year exceeds a reasonable commercial amount of interest on the loan for the relevant period”.

(3)After subsection (2) insert—

(3)The relevant period is the tax year or, if the loan exists for part only of the tax year, the part of the tax year for which the loan exists.

(4)A reasonable commercial amount of interest on the loan for the relevant period is an amount which, together with any interest paid before that period (other than unrelieved interest), represents a reasonable commercial rate of interest on the loan from the date it was made to the end of that period.

(5)“Unrelieved interest” means interest which because of subsection (2) is not eligible for relief under this Chapter.

(4)The amendments made by this paragraph have effect in relation to interest paid on or after 9 October 2007; but in relation to interest paid in the period beginning with that date and ending with 5 April 2008, they have effect as if the references in section 384(2) and (3) to a tax year were to that period.

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